The dot-com bust was bad for venture capital firms. This Great Recession has been another story altogether.

The severe downturn that has gripped the country for more than a year ravaged Southern California’s fragile venture capital industry, delaying fundraising and forcing even established local players to rethink strategies. At least one firm shuttered its L.A. office due to the challenges.

The dot-com bust earlier this decade, which decimated the tech industry, was thought to be the worst of times for the venture capital industry, but many found 2009 to be even worse.

“This is an economic cycle that we’ll tell our grandchildren about,” said Andy Wilson, managing partner of Momentum Venture Management, a Pasadena firm that invests in a broad array of companies.

After the financial crisis late last year, the equity markets locked up. With few public offerings of any type during the first half of 2009, the exit opportunities for venture investors disappeared and invested capital remained locked in startup companies, slowing the deal flow to a trickle.

Less than $400 million in venture capital was invested in L.A. startups through the first three quarters of 2009, according to data compiled by PricewaterhouseCoopers LLP and the National Venture Capital Association. That amount was down 64 percent from the same period in 2008, and represents the lowest total for any nine-month stretch in more than six years.

Thus, many local firms that remained active in 2009 either targeted smaller deals or made fewer investments.

Palomar Ventures in Santa Monica, for instance, normally makes about six investments in a year, but the firm did half that in 2009. Managing Director Jim Gauer said the falloff was a strategic response to the economy.

“We were not pushing to do deals rapidly in this environment,” he said. “It was a little bit of a falloff in quality deal flow and we had to set the bar a bit higher because it will be difficult for companies to succeed in a recessionary environment.”

Mark Suster, a partner at L.A.’s largest venture capital firm, GRP Partners in Century City, said his firm’s investments are about half the size they were a few years ago, a change he attributed in part to the reduced expectations for exits.

“The whole industry is doing smaller deals now,” he said.

Prism VentureWorks, a Needham, Mass.-based venture capital firm, even shuttered its Venice office this summer, saying it expects to shrink along with the industry.


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